From 2003 to 2008 the price of oil advanced from 30.00 to 145.00. During that time non-OPEC production stayed flat, at roughly 40 Mb/day of crude oil only.
Now that oil is either at or below 50.00, it’s time to conjecture how much of this non-OPEC supply would eventually be lost were price to stay at current levels, or go even lower.
First, let’s consider that oil has generally been above 50.00 for four years. Next, let’s consider that new oil sands and new deepwater oil brought on during that time needed a much higher price to be economic. Also, we should remember that many significant non-OPEC producers started their production declines during this period: The UK, Norway, Mexico and now Russia. Finally, we know that non-OPEC had to work very hard collectively just to make supply stay even for 6 years as the natural decline rate was large. Now that price has fallen so hard, we are seeing both immediate and future supply being taken away. It’s simply not economic to pump alot of new oil at these levels. non-OPEC oil is generally the hard to find, unconventional, high-labor cost, high-tech oil from the West.
My work so far suggests that we are at risk of losing 10% of non-OPEC supply if current prices persist for one year. And, that a good portion of that loss will start to show through by next Summer. I would regard 10% as the worst case, as I already think we are set to lose as much at 5%, based on events already underway.
While previously unthinkable in the current economic environment, the risk that a new price high in oil could occur next year is now back on the table. And I would choose late Q3 2009 as the likliest window for such a price-print to unfold.
-Gregor
